Expanding Disclosure for New Accounting Standards and Other Updates from the EITF

The Emerging Issues Task Force (EITF) held a third quarter meeting on September 23, 2016, and the results could have a significant impact on preparing financial statements. The meeting was notable, not for its discussion of open EITF issues related to restricted cash flows and accounting for service concession arrangements, but because of a Securities and Exchange Commission (SEC) staff comment. The SEC staff's comment, related to the disclosure of issued but not yet adopted accounting standards updates, could affect year-end and interim filings for SEC registrants, so entities need to evaluate its contents closely.

SEC Staff Announcement

During the meeting, the SEC staff comment related to its codified Staff Accounting Bulletin (SAB) Topic 11.M, Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period. SAB Topic 11.M specifies that SEC registrants are required to include disclosures about the expected impact of a final accounting standard once the standard has been issued but before it is adopted. If entities do not know the expected impact of the standard, they must disclose that statement along with other qualitative disclosures that could help clarify the impact the standard could have on their financial statement.

The SEC staff reinforced in the EITF meeting that SAB Topic 11.M applies to the accounting standards updates on revenue recognition, leases and financial instruments. However, in addition, the staff member stated that information beyond what has typically been disclosed by filers is expected. The staff member stated that if the expected effect of the adoption of the accounting standards update has not or cannot be determined, the entity should not only disclose that fact, but also a comparison of the to-be adopted standard to existing policies and the status of the process to implement the standard. The entity would also be required to provide additional qualitative disclosures to help users of the financial statement understand the potential impact of the new accounting standard. This means SEC registrants should consider whether their existing disclosures should be expanded in light of this discussion for their interim and year-end filings.

Entities that are not SEC registrants should be taking note as well; although they are not subject to the requirements of SAB Topic 11.M, to the extent the new standard is expected to have a material effect in future periods or significant restatements due to retrospective adoption, it may be appropriate to include similar disclosures in their financial statements. In addition, their financial statement users may be looking for comparable data about the nonpublic business entity's financial impact of adoption.

Statement of Cash Flows

In August 2016, the FASB released the EITF's eight small-scale changes to the cash flows with Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. Restricted cash flows had originally been considered as part of the project, but the EITF separated the issue for further discussion.

A final consensus on the restricted cash issue was reached during the September 23 meeting. The consensus is that restricted cash and restricted cash equivalents should be presented along with cash and cash equivalents in the statement of cash flows. If the reporting entity elects to present restricted cash flows separately on its balance sheet, it must disclose how the statement of cash flows reconciles to the balance sheet. Disclosures will be required about the nature of the restrictions. The final accounting standard update is expected to have an effective date of fiscal years beginning after December 15, 2017, including interim periods, for public business entities and fiscal years beginning after December 15, 2018 for all others. Adoption will be conducted on a retrospective basis.

Accounting for Service Concession Arrangements

The EITF added service concession arrangements to its agenda on August 31, 2016. The EITF had addressed a component of service concession arrangements when it reached a final consensus issued as ASU 2014-05, Service Concession Arrangements (Topic 853), but stakeholders expressed that Topic 853 allowed for a diversity of practice with significant impacts on the comparability of financial statements for entities that enter into these types of arrangements.

A service concession arrangement arises when an operating entity is granted the right to operate a government or public sector's infrastructure (e.g., airports, roads, bridges, tunnels, hospitals, etc.) for a set time. Depending on the arrangement, the operating entity may also be required to construct, maintain, or make improvements to the infrastructure.

Operating entities may receive payments from the government or public sector entity (the grantor) during the arrangement. They may also charge third parties for use of the infrastructure. Grantors may provide unconditional guarantees for a minimum guaranteed amount that the operating entity will receive during the arrangement. Topic 853 covers accounting for service concession arrangements that meet the following criteria:

• The grantor controls or has the ability to modify or approve the services the operating entity must provide with the infrastructure and to whom it must provide them and at what price, and
• The grantor controls, through ownership, beneficial entitlement or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.

Operating entities within the scope of ASC Topic 853 do not account for the arrangement as a lease or as property, plant and equipment. However, ASC Topic 853 does not specify which asset, if any, the operating entity should recognize for these arrangements. Operating entities must consider other accounting guidance to account for the different elements of their service concession arrangements. This practice has led to questions about which guidance applies, particularly in light of the new revenue recognition standard.

In the September 23 meeting, the EITF reached a consensus-for-exposure that the operating entity should view the grantor as a customer in service concession arrangements, which would clarify how the arrangement should be interpreted under ASC Topic 606 Revenue from Contracts with Customers. Operating entities would adopt the change using similar transition requirements that are outlined in the ASC Topic 606.

Employee Benefit Master Trust Reporting

Not on the agenda for the September 23 meeting were the changes proposed to Employee Benefit Master Trust Reporting. The EITF released its exposure draft on the topic on July 28, 2016, and the public comment period closed on September 26, 2016. Redeliberation on the stakeholders' feedback will likely pick up in the fourth quarter.

For More Information

If you have specific comments, questions or concerns about the EITF issues, please contact Mark Winiarski of MHM's Professional Standards Group. Mark can be reached at mwiniarski@cbiz.com or 816.945.5614.